BP and Eric Holder's Deepwater suit

BP's complex corporate structure means any damages have to be weighed against the risk of bankrupting its Gulf subsidiary

US attorney general Eric Holder announced on Wednesday that the department of justice was launching a lawsuit for damages against BP and eight other oil and contracting companies over the Gulf Deepwater Horizon oil spill. Photograph: Chip Somodevilla/Getty

Thursday 16 December 2010 13.00 EST
First published on Thursday 16 December 2010 13.00 EST

The DOJ is seeking civil penalties under the Clean Water Act, and wants to declare eight of those companies "liable without limitation" for the costs of cleanup and damage caused by the disaster. The Clean Water Act fines alone could add up to as much as $21bn. The companies face a fine of at least $1,100 per barrel spilled, and that figure would increase to $4,300 if the court determines that the companies were negligent. The final government estimate of the spill was 4.9m barrels, which means the fines add up quickly.

The DOJ suit, filed in the US district court in New Orleans, argues that all of the listed companies in some way "caused or contributed" to the oil spill. That includes BP and several companies under the parent corporations Anadarko and Transocean, along with MOEX Offshore 2007 LLC, Triton Asset Leasing GMBH, and QBE Underwriting Ltd/Lloyd's Syndicate 1036 (BP's insurer) as responsible parties. The DOJ suit lists the alleged oversights: failure to take precautions to control the well before the April 20 explosion, failure to use the best and safest drilling technology, and failure to make ensure the protection of employees, equipment, and the environment. Attorney General Eric Holder announced the suit as part of the DOJ's ongoing effort to "ensure that the American taxpayers are not forced to bear the costs of restoring the gulf area and its economy is moving forward."

Here's the rub, though. The suit is filed against BP Exploration and Production Inc, which is the same subsidiary that made the agreement with the federal government to set up a $20bn escrow fund to compensate the individuals and businesses affected by the spill. The agreement calls for the company to deposit $5bn into the escrow fund this year and an additional $1.25bn every quarter from 2011 through 2013.

BP Exploration and Production Inc is a subsidiary of BP America Production, and it deals primarily with Gulf of Mexico production. BP America Production is, in turn, a subsidiary of BP Company North America, which is a subsidiary of BP Corporation North America, which is a subsidiary of BP America Inc, which is a subsidiary of the parent company BP plc. That means both the suit and the escrow deal with a subsidiary five layers removed from the multinational oil giant BP – and this could make it difficult to access additional funds from the corporate parent, should the subsidiary collapse.

Thus, actually getting the money, via the escrow fund and the lawsuit, is contingent upon keeping this comparably small BP Gulf subsidiary profitable – something that might not happen if the federal government actually cracks down on the company. Some have worried that this situation creates a perverse incentive for the company not only to continue, but also to increase offshore drilling in the United States, so that they can cough up the cash. Meanwhile, the parent company could avoid liability.

Another thing worth noting: several other companies involved with the Deepwater Horizon spill – cement provider Halliburton and blowout preventer manufacturer Cameron – aren't listed on this complaint. The absence of Halliburton is perhaps most notable, since one of the more interesting details to emerge from the investigation so far is that Halliburton knew well ahead of the explosion that the cement mix they were using on the well didn't work. That's not to say that the company couldn't be listed in future complaints, of course, and Attorney General Holder stressed that the civil and criminal investigations are ongoing. This does, however, give a sense of where the DOJ is assigning blame at the present.

Meanwhile, BP has indicated it intends to challenge the federal government's estimate of spill size, claiming that the 4.9m barrel figure could be overestimated by as much as 50%. So, while the DOJ suit is a significant development, the process of holding those responsible for the biggest environmental disaster in US history is really just beginning.